How many times have you heard directly or at least been able to infer that, “Economics just doesn’t apply to that!” I hear it quite often, even from within the echo-chamber of economists. You’ll probably most likely encounter it in discussions/arguments about health care and the environment, or some other social phenomenon of importance. Before getting to my point, I find it particularly ironic when people say “economics doesn’t apply to health care” or “economics does not work in health care.” Why? It was a famous economist who wrote a paper a half-century ago laying out the economic problem of health care. His name was Kenneth Arrow. When Arrow wrote that paper, he did not end it with, “ahh, so I’ve demonstrated that economics does not APPLY to health care, and since I’ve done this I recommend that there is nothing an economist can do or say on the issue.” Far from it.

The adoption of that Arrowian position on the “economic broken-ness” of health care to mean that economics does not apply to it very much reminds me of the way that folks have adopted the language of “externalities” to claim that economics cannot deal with environmental issues. I’ve spilled too much virtual ink on that topic to want to continue it now.

But let’s take the comment seriously as both economists and interested readers. What can it possibly mean? When someone says, “economics does not apply to health care” they have to know something about what economics is (indeed many economics majors still cannot articulate this after 4 years of classes). Then they probably have to articulate what they mean by “health care.” Do they mean the ability to produce and sell an aspirin? My ability to purchase an ice-pack or an ace bandage? The challenge of caring for the elderly? Health insurance? Everything health related? It’s no more useful to have a discussion about “health care” than it is for me and you to arrange to meet today at 4:30 to talk about “things.”

But assume we know what folks mean when they say health care. What can it possibly mean to say that economics does not apply? Well, we know the most basic lesson of economics, as it is a study of human behavior, is that people respond to incentives. So to argue that economics does not apply to health care is to say:

In health care, people do NOT respond to incentives.

I find that to not only be an implausible proposition, but also one that is not believed by those who make the claim that economics does not apply to health care.

OK, so if we don’t mean that incentives don’t matter in health care, let’s move onto the fundamental reason we need to study economics: scarcity. Put simply, there’s not enough stuff to go around. And because of this problem, any time we aim to secure more of something we value, the laws of nature dictate that we must trade something off to obtain it. So, do folks believe that economics does not apply to health care believe that:

In health care, there is no such thing as scarcity.

Well, if that’s the case, then as my friend Alex says, “the jig is up.” Repeal Obamacare immediately, as it is unnecessary. Repeal Medicare immediately, as it is unnecessary. Eliminate all insurance companies, as they, too, are unnecessary. It would be great if heart-bypass operations performed themselves, using no electricity or materials that are valued in other uses. It would be great if I could call a doctor (in a time-warp of course, because there would be no opportunity cost of my call) and actually get a response from a person who gave a damn. It would be amazing if I could fall off a rockface while climbing and blink my eyes three times to find my fractured tibia healed. Of course this is all ludicrous. The problem people see with health care in fact is that they think it is more scarce than many other “goods.” And it is when goods are most scarce that the insights of economics would be particularly useful to appreciate. I’ve always argued that there’d be no economists in heaven (maybe that’s what makes heaven heaven).

OK, so people really don’t mean that. Maybe people mean that the way people respond in the face of scarcity is “different” when it comes to health care and the environment. Economists are regularly ridiculed for observing that when there is not enough stuff to go around, people tend to follow a typical hueristic to help them decide what trade-offs are worth making and which ones are not. The term we have for that is “economizing behavior” but you have heard it ridiculed as “rationality” or “efficiency.” When it comes to the fact that there is not enough health care for me to have all that I want, or not enough health care for the collective of Americans to get all that they want, do people really mean that people do NOT try to select the actions where the expected additional benefits exceed the expected additional costs? This is, folks, what we mean by efficiency – that when we choose ex ante (not analyzing it ex post) we make the best choice we can for ourselves.

It’s not funny how “the obsession with efficiency among economists” has become the object of scorn. Efficiency boils down to individuals TRYING to make choices that “they like” and that are “good for us.” This, then is a particularly interesting irony. Folks argue that economics doesn’t apply to health care, but in the next breath ridicule people (economists) for studying the economizing behavior of agents within the health-care sector. What’s it going to be? Pretty soon we’ll be reading people arguing that “math doesn’t apply to football” by showing that coaches underestimate the probability of success by going for it on fourth-down.

Economics is nothing more than the study of human action under conditions of scarcity. People may not like being told that bread does not bake itself and drop into our mouths warm and crusty upon our commands. People may not like being told that the scarcity problem tends to be handled better when private property institutions are established and respected and the Rule of Law is part of the cultural fabric. People may not like being told that scarcity applies just as well to the choices we face over-time. People may not like being understanding that their beloved political gods are tugged by the same pull of incentives that ordinary Joes are. But not liking it doesn’t mean a darn thing about whether economics applies.

What do I think about all of this? People like to mentally substitute things they like or can feel for things that they don’t want to have to think hard about. So when folks say, “economics doesn’t apply to the environment!” I strongly suspect that what they mean instead is that “capitalism” or “freely exchanging” should not be practiced for environmental amenities. That is an entirely different position to take. It’s one I will argue in the future that opponents still do not understand. Indeed, the more serious the problems we face, the more attention we ought to pay to economics and the more respect ought to be given for the possibility of voluntary association to operate.

4 Responses to “Economics Doesn’t Apply to That”

Mark that one for a chapter in one of your next books. WC has a talent for expressing things in refreshing, intriguing, original ways, even to the most jaded among us. I volunteer to be an editor, assuming I can afford the time, of course.